U.S. Stocks Seen Rising Next Week Ahead Of Fed Meeting

SAN FRANCISCO (MarketWatch) - U.S. stocks are likely to rise early next week with another interest rate cut all but guaranteed from the Federal Reserve, but strategists said the strength and durability of any gains will hinge on the central bank's outlook for the economy and on whether there is any further fallout from the credit-market meltdown.

Investors will receive a stack of economic reports next week, beginning with Monday's report on pending home sales and November wholesale and consumer inflation figures and retail sales later in the week.

Add to the mix quarterly results from Lehman Brothers Holdings , which kicks off an early earnings season for the securities industry after the close of the quarter for the group at the end of November. Wall Street analysts this week continued to ratchet down their profit forecasts for the group in light of the trouble in the subprime-mortgage fueled credit mess.

But the highlight will come Tuesday, with the last rate decision of the year by Fed policymakers. Stocks may see a bump up if the Fed announces a rate cut, a move that market players have clamored for as the housing slump and the credit crisis has deepened.

"Given that [Fed Chairman Ben] Bernanke and [Vice Chairman Donald] Kohn have been speaking out about financial flexibility, they will probably re-emphasize that and, as a result, stocks will go a little bit (higher next week)," said Doug Roberts, chief investment strategist at Channel Capital Research, who said the Fed's accompanying rate statement will be set the stage for the direction of stocks.

A stronger-than-expected number addition of 94,000 jobs in November calmed some near-term fears that the economy is careening toward recession in the wake of the credit mess, but the report also hobbled chances for a half-point rate reduction from the benchmark lending rate of 4.5%.

After Friday's report, federal funds futures on the Chicago Board of Trade reflected a 48% chance of a 50 basis-point cut, down from 56% before the report's arrival.

Friday's results

Stocks closed mixed Friday but notched gains for the week, led by Thursday's surge after the White House outlined its plan to stem the surge in home foreclosures. The proposal, which was agreed upon by the mortgage industry, includes a 5-year freeze on interest rates for certain subprime loans.

The Dow Jones Industrial Average closed Friday up 6 points at 13,626 and by 1.9% for the week. The S&P 500 ended the week up 1.6% and the Nasdaq Composite Index record a weekly rise of 1.7%.

Roberts said "a good portion" of any advance next week will depend on crude-oil futures. Oil futures fell 2.2% on Friday to $88.28 a barrel on the New York Mercantile Exchange, and by 0.5% for the week.

"If oil continues to back off, that reduces stress on the economy and gives the Fed more flexibility...if there is less inflationary pressure," he said.

The jobs report also showed an uptick in wage inflation, with hourly earnings up 0.5%, above the expected rise of 0.3%. Investors will look for more evidence of rising inflation on Wednesday and Thursday with the release of the PPI and CPI reports.

The producer price index is expected to jump 1.4% from October's 0.1% rise, according to a survey of analysts by MarketWatch. Excluding food and oil prices, the core rate is foreseen to hold steady at 0.2%.

The headline consumer price index is expected to rise 0.6% in November, up from 0.3%. However, the core rate is forecast at 0.1%, down from te previous reading of 0.2%.

The headline numbers are "not going to be a pretty picture," said Hugh Johnson, chairman of Johnson Illington Advisors." But he foresees a muted reaction to them if they come in line with expectations because of widely held view that headline inflation will begin to subside throughout 2008.

The "wild card" for the market, said Awad, is "everyday that we are in business, we get further news on asset write-downs, and the implications for that on liquidity and the willingness of people to lend money. [There's an] optimistic spin based on the Bush program and the Fed lowering rates, but that spin is vulnerable...based on further write-downs, which is inevitable."

In Johnson's view, the market will be able to manage more subprime-related warnings "if the Fed does enough, and if the [White House foreclosure] plan does enough...because it will see that proverbial light at the end of the tunnel."

Results and reports

Ahead of the rate decision, the National Association of Realtors will issue its report on pending home sales for October on Monday. In its September report, the industry group's index was 85.7, a sharp drop from 107.6 in the year-ago period, but up from the prior month's level of 85.5.

On Tuesday, the Commerce Department will release figures on October wholesale inventories.

A reading on the import price index for November will arrive Wednesday. Analysts are looking for a rise of 2.1% from 1.8%.

The October trade gap figures will also arrive Wednesday, with expectations for a rise to $57.6 billion from $56.5 billion in September when a surge in exports pushed the trade deficit to its lowest level in more than two years.

Retail sales for November, due Thursday, are expected to show an increase of 0.3% from 0.2% in October. Heading into that report, Thomson Financial said Friday that its same-store sales index for November came in at 4%. That's above expectations for 3.3% and above last year's result of 2.5%. Excluding retail giant Wal-Mart Stores Inc. , the index increased to 6%.

Quarterly results from broker Lehman Bros. will be under scrutiny Thursday. Wall Street expects the company to post a 14% decline in fiscal fourth-quarter earnings to $1.47 a share on a 4% fall in revenue to $4.36 billion. During the third quarter, Lehman wrote off more than $1 billion of leveraged buyout loans.

Industrial production for November, as measured by the Federal Reserve, is expected to show a decrease of 0.2%, less than the 0.5% decrease in the prior reading.